Below are analyst updates on our nine current high-conviction long and short ideas. We will send Hedgeye CEO Keith McCullough's refreshed levels for each in a separate email.
Please note that we removed HCA Holdings (HCA) from the short side and Panera Bread (PNRA) from the long side.
IDEAS UPDATES
FXB | UUP
It was another week of growth accelerating data that supports our preferred exposures.
With regard to our long U.S. Dollar (UUP) and Pound (FXB) calls, remember that when growth and inflation are accelerating (Quad2), the policy response is to tighten which is good for the currency on the margin.
We believe the chart below is very supportive of the U.S. dollar (the set-up in the U.K. has a similar dynamic) on an outgoing basis when you consider that currency wars are all about correctly fronting policy shifts from major central banks.
In Q2 and Q3 of 2017 both the Eurozone and Japan are in a growth slowing environment whereas the U.S. has a set-up where continued policy normalization is the expectation (red line is U.S.):
Now let's dig into this week’s growth accelerating data. Tuesday and Friday were the big data days with releases that are relevant to our predictive Growth, Inflation, Policy model. Get ready…
Tuesday: NFIB small business optimism registered its highest print since 2004 at 105.80
Friday: The all-important component of retail sales continued to accelerate Y/Y in December and headline PPI accelerated to its highest Y/Y growth rate in 28 months.
PPI: Core PPI held flat at +1.6% YoY while headline accelerated +30bps sequentially to a new 28-month high at +1.6% YoY. Core Goods price growth exceeded core services price growth for the 1st time in 30-months, as energy prices recover against easing comps and food inflation comes in less negative.
Retail Sales: The important number that we look at which feeds into GDP and is a big part of our GIP model is the control group trend in retail sales. The headline and control group readings increased +0.6% and +0.2% sequentially, respectively – a little light of expectations ... However, this was more than enough to solidify +50bps of acceleration in 4Q. The second chart below shows this trend.
TWX
Click here to read our analysis on why we think the AT&T/Time Warner (TWX) deal will be approved. Below is an institutional research note written by Telecom & Media policy analyst Paul Glenchur this week:
On Monday, Fox News ran yet another Charlie Gasparino segment in which the Fox reporter said President-elect Trump has asked advisors for reasons to oppose the AT&T-Time Warner merger. Even if such reports are way off the mark (and they might be), they can rattle investors and increase headline risk for the merging entities. Candidate Trump stated his opposition to the deal within hours of its announcement during the campaign.
The deal is now under Justice Department review. Regulatory risk to the deal actually declined when AT&T indicated this week that it would not need to seek separate FCC approval because it does not plan to transfer FCC licenses from Time Warner to AT&T. We figured FCC avoidance was likely (Hedgeye Potomac, AT&T-Time Warner Should Get Regulatory OK, Oct. 23, 2016).
We continue to believe the merger will win the regulatory okay in Washington later this year.
Ironically, the Fox News reports (and some from other media outlets) probably bolster the likelihood (without guaranteeing) that the Justice Department will not seek to block the transaction. The Antitrust Division, as fully expected, issued a second request for data on December 8 and tangible agency action toward the merger will await substantial compliance with the data request (which is confidential). Thus, the likely Justice Department decision regarding this deal will be made by the incoming DOJ team.
Click here to continue reading Glenchur's institutional research note.
CRI
Click here to read our analyst's original report.
The barriers to entry have been coming down for the clothing industry. With the proliferation of online shopping, anyone can start a brand in clothing and bring it to the consumer market via a website. This is very different from the past when brands needed to have large scale and the ability to produce many units to get into the large retailers where people would buy their clothes.
Carter's (CRI) has a great brand and invested properly to grow its market share. However, as the barriers continue to fall, the rate of market share gain is slowing, and profitable growth is becoming harder and harder to find.
CERN
Click here to read our analyst's original report.
Cerner (CERN) lost another deal in the small hospital market with East Phillips County Hospital selecting athenahealth (ATHN) for their EHR after a thorough search process. Per the local newspaper article, “MMH nurse practitioner Jessica Skomp told board members at the Tuesday meeting that she was on the fence between Cerner and Athena before the trip to see the two systems in action but is now convinced Athena is the way to go.”
This provides additional confirmation to our view that ATHN’s entrance to the market will be a risk to CERN bookings in 2017.
WFM
Click here to read our analyst's original report.
No update on Whole Foods Market (WFM) this week but Hedgeye Consumer Staples analyst Howard Penney reiterates his long call.
WMT
Click here to read our analyst's original report.
While much of the consumer retail space is facing wage pressure, Wal-Mart Stores (WMT) is well ahead of the curve in employee compensation.
In 2017, 20 states are raising their minimum wage. None of these states happen to be the 21 states that only pay the Federal Minimum wage right now. The States that are proactively taking up wages in 2017 are the progressive employee-friendly states that are already well above the Federal Minimum Wage.
The bigger callout for us is the retailers, and where they pay relative to Wal-Mart, which took up wages for all employees last year. The biggest offender is KSS, which is 8% below WMT.
WMT was below the retail average before this year, but upped its game. That happened throughout 2016, and we should see the brunt of the wage change impact on employment in 2017. In other words, we’ve already seen much of the cost impact, but given the lag with pay and employee productivity, the benefit/share gain follows about 6-12 months later.
PENN
Click here to read our analyst's original report.
Despite recent softness in both the stock performance and regional gaming reports for December, we reiterate our conviction in the near term for shares of Penn National Gaming (PENN).
On a relative basis, PENN outperformed their competition in 4Q 2016, despite a soft December industrywide. Looking forward, we continue to see a capital return program as very likely in 2017, and given the cheap valuation, it won’t take much in the way of a positive catalyst to get the stock up.
MU
No update on Micron Technology (MU) this week but Hedgeye Technology analyst Ami Joseph reiterates his long call.
